Investor Relations | IR Events | Performance Briefing

[ Financial Results for Fiscal 2007 Performance Briefing ]Consolidated Results

Mr. Seiji Enami
Director
Corporate Officer
General Manager
Finance & Accounting Department

Mr. Seiji Enami
Director
Corporate Officer
General Manager
Finance & Accounting Department

Good afternoon. You have just heard from the president. I would now like to give you some more information about our consolidated results and financial position. My presentation will follow the tanshin (earnings release) you have in front of you.

Please turn to the consolidated income statements on page 13 of the tanshin. As Mr. Kamigawa reported, operating income for the fiscal year just ended was 79.6 billion yen, up 19.1 billion yen year on year. One factor was continued robust demand for passive components, mainly for digital home appliances. A second reason was that the HDD heads business battled strongly despite the loss of a major customer. A third factor was the benefits of structural reforms in the recording media segment.

Breaking the increased operating income down, the main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed 43.6 billion yen; lower materials costs, which contributed 16.0 billion yen; rationalization and cost-cutting, which contributed 20.5 billion yen; and exchange rate fluctuations, which contributed 6.1 billion yen, due to a 3.65 yen depreciation against the U.S. dollar and 12.19 yen depreciation against the euro. Positive factors thus lifted earnings by a total of 86.2 billion yen. Turning to factors that negatively affected earnings, sales price discounts had a 60.9 billion yen detrimental effect, and there was an increase of 6.2 billion yen in selling, general and administrative expenses. The combined negative effect was 67.1 billion yen. However, since negative factors were outweighed by positive factors, operating income increased by 19.1 billion yen.

Structural reform expenses for fiscal 2007 were 7.0 billion yen. In the sense that these expenses were 7.2 billion yen less than the 14.2 billion yen recorded in fiscal 2006, there was a positive effect on earnings. Previously we forecast operating income of 82.0 billion yen, yet actual operating income fell short of this projection at 79.6 billion yen. One reason for this difference was that depreciation expenses and R&D expenses each rose by 1.0 billion yen in the fourth quarter compared with actual figures in the third quarter. Another reason was that structural reform expenses at 7.0 billion yen were 2.9 billion yen higher than the 4.1 billion yen we had estimated. Of the total, 3.5 billion yen was incurred in the fourth quarter of fiscal 2007.

Structural reform expenses increased because we gave priority to making improvements to our operations. There were three reasons for the higher-than-expected structural reform expenses. One was that we incurred approximately 1.3 billion yen related to realignment of our asset portfolio, including valuation losses, as we reclassified some assets from operating assets to assets for sale as a result of structural reforms. Secondly, the disposal of products that didn't comply with RoHS resulted in costs of approximately 0.6 billion yen. The remaining 1.1 billion yen of the 2.9 billion yen increase above forecast was incurred for disposing of facilities due to manufacturing line reforms. In addition, we recorded 0.5 billion yen in restructuring costs in statements of income only for the portion carried over from the previous fiscal year when structural reforms were implemented, mainly in the recording media business in Europe. These restructuring costs don't include all extraordinary expenses, only those that can be recognized as such for accounting purposes.

Other income improved 3.5 billion yen year on year, the result of higher interest income due to increased or high interest rates around the world and an increase in the investment of funds.

Looking now at income taxes as a percentage of income from continuing operations before income taxes, the tax rate fell sharply from 31.9%, calculated as 21.1 billion yen in income taxes divided by 66.1 billion yen in income from continuing operations before income taxes, to 19.2%, likewise calculated as 17.0 billion yen divided by 88.7 billion yen. One reason for this large decline was that several advanced pricing agreements (APAs) that we had requested were settled with tax authorities after a period of three to four years. Due to the settlement of these APAs, tax reserves we had provided for were no longer deemed necessary and were thus reversed. We view these settlements as a successful outcome for TDK. Previously, TDK received correction notices based on the Japanese transfer pricing taxation regime for an additional 21.3 billion yen in taxes. TDK has lodged objections to these determinations. The reversal of taxes I have just explained in relation to APAs is an entirely separate issue from our ongoing dispute with the tax authorities. Another reason relates to the large loss due to restructuring in the previous fiscal year at a recording media plant in Europe. Ordinarily, this would not have a direct impact on post-tax income because the tax effect could be recorded as deferred tax assets. However, because deferred tax assets weren't recognized given the improbability that taxable income would be available in the future to utilize the loss, there was a direct effect on post-tax income. There were no such tax valuation allowances in fiscal 2007, resulting in the large difference in tax rates between fiscal 2006 and fiscal 2007.

Please now look at the consolidated balance sheets on page 12 of the earnings report. Total assets at March 31, 2007 stood at 989.3 billion yen, 65.8 billion yen higher than a year ago. The yen depreciated slightly against the U.S. dollar, falling from 117.47 yen at the end of March 2006 to 118.05 yen at March 31, 2007. During this same period, the yen depreciated about 10%, or approximately 15 yen, against the euro, falling from 142.81 yen to 157.33 yen. These changes had the net effect of increasing yen translations of overseas assets by 8.9 billion yen. This effect is included in the 65.8 billion yen increase in total assets. Cash and cash equivalents were 289.2 billion yen. This mainly reflects net income of 70.1 billion yen and add back of depreciation and amortization on fixed assets of 65.3 billion yen, countered by 70.4 billion yen in cash used for capital expenditures and 13.2 billion yen for the payment of dividends. Cash and cash equivalents on the balance sheet thus increased 50.1 billion yen due to these and other changes. Short-term investments, which you will see below cash and cash equivalents on the balance sheet, actually also represent cash. These two items combined meant that cash exceeded 300.0 billion yen at March 31, 2007.

Stockholders' equity increased 60.3 billion yen from 702.4 billion yen to 762.7 billion yen. Accumulated other comprehensive loss, a component of stockholders' equity, improved 4.1 billion yen to 17.8 billion yen. Breaking this account down, foreign currency translation adjustments was a negative 16.7 billion yen, improving 4.4 billion yen due to the weaker yen, pension liability adjustments was a negative 2.9 billion yen, up 0.3 billion yen; and net unrealized gains on securities was 1.8 billion yen, up 0.1 billion yen.

Please return to the bottom of page 1 of the tanshin for a breakdown of sales. The president has already given you the results for each segment and an overview, so I will give you the sales composition by product sector in each segment and draw comparisons with the previous fiscal year.

First, let's look at the electronic materials and components segment. Segment sales accounted for 88.0% of overall sales and rose 10.3%. The electronic materials sector accounted for 23.1% of total sales as sales rose 10.2% year on year. Capacitor sales were up 12.5% and accounted for 69% of sales in this sector. Ferrite and magnet sales increased 5.4% and accounted for the remaining 31% of sales in this sector. The electronic devices sector accounted for 23.0% of total sales and sales were up 28.1% year on year. Sales of inductive devices were up 19.9% and were 39% of sector sales. Sales of high-frequency components were down 9.6% and accounted for 5% of sector sales. Sales of other products were up 39.9% and represented 56% of sector sales.

In the recording devices sector, which was 35.4% of total sales, sales were down 3.5% year on year. Sales of HDD heads, which were 96% of sector sales, declined 2.4%. Sales of other heads, which accounted for the remaining 4%, were down 25.4%. In other electronic components, which accounted for 6.5% of total sales, sales were up 55.5%.

Next, in the recording media segment, sales were down 3.9% year on year and accounted for 12.0% of total sales. Sales of audiotapes were down 20.2% year on year and accounted for 4% of segment sales. Sales of videotapes were down 19.4% and accounted for 17% of segment sales. Sales of optical media were up 1.7% and accounted for 53% of segment sales. Sales of data tapes and others increased 1.2% and accounted for 26% of segment sales.

Former TDK president Hajime Sawabe said in the past that he wanted to build a profit structure based on electronic components (electronic materials and electronic components) but augmented by HDD heads and recording media. Recently we decided to sell our sales business for TDK brand products in the recording media segment to U.S. company Imation Corporation and our HDD heads business has seen sales drop in the face of M&As in the industry. Looking at the year-on-year changes I have just discussed, based on the fact that we generated higher sales and earnings mainly in electronic materials and electronic devices, we feel that we are gradually moving toward establishing an earnings structure built on three pillars, including HDD heads, if not four.

You have requested an explanation of how revisions to the corporate depreciation regime affect TDK. Let me explain. Up to March 31, 2007, TDK has depreciated assets to a nominal value of 1 yen for tax purposes. Therefore, we don't think there will be any effect on our income statement. The new rules mean that accelerated depreciation rates can be applied to assets purchased on or after April 1, 2007. So there will be an effect in the sense that depreciation will increase compared with the previous regime. However, TDK applies SEC accounting standards, which depreciate assets based on economic useful life as opposed to useful life prescribed by statute. Accordingly, as far as there is no particular change in economic useful life, the opinion of our accountants is that basically no change will be permitted in our consolidated accounting based on SEC standards. While there will be no effect then on our consolidated financial statements, there will be tax consequences. We made our consolidated projections based on this understanding.

In closing, I would like to talk about our announcement today along with our earnings release that we plan to buy back 4 million of our own shares to improve capital efficiency and raise the level of return for our stockholders. You'll recall that former TDK president Hajime Sawabe stated on a number of occasions during IR events that if cash on hand reached 300.0 billion yen, TDK would consider buying back shares, as that level of cash is needed for businesses operating in volatile business environments. As I touched on before, TDK's cash reserves currently exceed 300.0 billion yen. Mr. Kamigama shares the same view as Mr. Sawabe and is determined to implement strategies that raise TDK's corporate value and returns for shareholders. Today's announcement demonstrates that intent.

On page 9 you will see details of dividends. You may note that we plan to raise the year-end dividend by 10 yen per share from 50 yen to 60 yen, to bring the annual dividend to 110 yen. This would represent a 20 yen per share increase on the dividend applicable to the previous fiscal year. We plan to pay a dividend of 120 yen applicable to fiscal 2008, made up of an interim dividend of 60 yen and a year-end dividend of 60 yen. We are thus constantly increasing the dividend and this too is an indication of our intent to return profits to shareholders.

That concludes my presentation. Thank you.

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